The People's Bank of China is seeking to allay fears of a credit crunch after a shortage of day-to-day cash among commercial banks in the world's second biggest economy drove market interest rates to almost 10% on Monday.
Beijing said it would top up the $50bn in liquidity provided to the markets last week as it sought to counter concerns that China's financial sector is gripped by the sort of squeeze that caused havoc among western banks during the crisis of 2007-08.
Benchmark interbank rates – the rates at which banks lend to each other rather than to the public – climbed to 9.8% at one stage on Monday, their highest for six months, despite the central bank's cash injections last week.
The actions by the PBOC were a response to signs of tensions in the far east's financial markets, caused by an earlier tightening of policy by the central bank, aimed at reducing the risk of cheap credit causing asset bubbles.
Banks in China often find themselves short of cash at the end of the year as companies increase their demand for capital and institutions have to meet tough regulatory requirements. China's growing shadow banking system, which tends to offer higher interest rates to investors, has also been draining funds from traditional banks.
Lorraine Tan, director of equity research at S&P Capital IQ, told CNCBC that the PBoC may need to take more action.
"I think it's just a momentary thing … it's a seasonal issue, a rush for cash. Definitely the PBoC needs to pump in more money, which it has been doing, but a little bit more is probably necessary."
Beijing pumped trillions of yuan into the economy during the global meltdown of 2008-09 and succeeded in ensuring that recession was short-lived. But officials have grown increasingly concerned that the stimulus encouraged excessive borrowing by commercial property companies and by local government. The PBoC has been pushing up interest rates in recent months to rein in credit growth without causing a "hard landing".
Investors fear the combination of Fed and tighter China interest rates could weigh on emerging market currencies and assets, as it did back in June.
Worries about the banking system contributed to a 2% drop in Shanghai shares on Friday, although the stock market steadied on Monday after Christine Lagarde, the managing director of the International Monetary Fund, said she would be revising up her forecasts for US growth in 2014.
The export-focused economies of east Asia are heavily dependent on demand from the world's biggest economy, and Lagarde said recent data from the US suggested that the Fund's estimate of 2.6% for 2014 was too low.
Source: theguardian
